The economy is on the brink of a record

The longest expansion ever, a milestone the U.S. will hit in July…10 years with no recession.

Can it keep going, or is a downturn near?

U.S. Economy

There’s cause for concern, but not alarm. That’s our judgment after conversations with economists and business people, plus studies of the latest economic data. Recent drops in stocks, Treasury yields and commodity prices are worrisome for the economic outlook but don’t raise red flags yet.

Growth this year still looks OK at 2.5%.

Next year is the worry. Even if all goes well in 2020, GDP growth will still come in under 2%. But it wouldn’t take much to drop that to about 1%.

Manufacturing is clearly a trouble spot. After thriving in 2018, industrial output is flattening because of trade fights and slower capital spending. Actual and potential trade disputes are a reason for many firms to rethink expansions or new plants.

Exporters face a dismal overseas picture. Europe is beset by economic troubles…recession in Italy, weakness in Germany and the U.K., etc. China is slowing, with ripple effects for Asia’s other economies. The best that can be said is next year looks a tad better.

A lot is riding on the outcome of the U.S.-China trade talks. An agreement would give both countries’ economies a shot in the arm and cheer financial markets. A breakdown that leads the White House to act on its threat of levying 25% duties on everything China exports to the U.S. would hit hard on both sides of the Pacific. The cost to U.S. consumers and businesses would offset much of the 2017 tax cuts.

Other risks loom, too: A stock sell-off that could ding consumer confidence.

Or an ugly showdown in Washington over spending. Come autumn, Congress and the president must agree on funding federal agencies and lifting the debt ceiling.

And several possible geopolitical worries…most recently, in the Persian Gulf.

All that aside, there is still a lot that is going right with the economy:

Ultralow unemployment…the lowest in 50 years. More folks are working, earning a paycheck and spending relatively freely, which is key for the economy.

Solid business confidence, except for manufacturers. Most small firms still feel good about their prospects and want to expand, if they can find the workers.

Low inflation and, by extension, reduced interest rates. The Federal Reserve can afford to cut rates a bit to support the economy, since inflation is fairly benign.

The bottom line: The economy is slowing, but gradually, not nose-diving. Plan for slower growth. Be alert to the risks ahead. But don’t overreact, either.

Trade

Not even Canada can get away from the U.S.-China trade war. The squeeze is coming from both sides. Canadian GDP growth will slow if the U.S. economy suffers from a tariff-induced slowdown…the U.S. is Canada’s largest trading partner.

China wants Canada to pay a price for supporting U.S. initiatives on trade.

One major point of dispute: A detained Chinese executive. In 2018, Canada seized the chief financial officer of the tech giant Huawei on a U.S. arrest warrant. China has since retaliated by blocking imports and arresting three Canadian citizens.

Ottawa fears further retaliation from Beijing if U.S. and Chinese officials can’t bury the hatchet at the upcoming G-20 summit in Japan later this month.

Chinese tariffs are pinching Maine’s lobster industry. Lobster exports to China are down 84% since Beijing imposed retaliatory duties in 2018. In 2017, Chinese customers bought nearly $130 million of the state’s iconic crustacean.

Canada has stepped in to satisfy China’s growing appetite for lobster.

U.S. lobstermen fear clawing back business lost to their competitors north of the border will prove difficult, even if the tariffs are eventually lifted. Lobsters are big business in Maine. The industry’s economic effect on the state is a sizable $1.5 billion.

Maine’s congressional delegation is asking for help, but the White House appears unlikely to act anytime soon. Lobstermen are not eligible for the $16 billion in aid recently announced by the administration for farmers hurt by the trade war.

Global Economy

Brazil isn’t at risk of recession. But future growth will depend on reforms proposed by the country’s new government, led by firebrand Jair Bolsonaro. His main priority: Fixing Brazil’s bloated pension system, which allows workers to retire at any age, with some stipulations. A minimum retirement age of 65… Bolsonaro’s proposal…could result in $310 billion in savings over the next decade.

Latin America’s largest economy is still staggering under a heavy debt load, now equal to 77% of the country’s annual economic output. A recession in 2015-16 and slow growth in the following two years left government finances in rough shape.

Ag

Ongoing flooding is obstructing barge traffic on the Mississippi River. Even more bad news for farmers, who rely on Old Man River to ship grain out for export. The contiguous U.S. had the wettest Jan.-May on record this year. Many places along the Mississippi are experiencing their worst flooding in decades.

So far, 200 miles of the river have been shut down, stranding hundreds of barges. The number of grain barges unloaded at ports on the lower Mississippi is down 15% from last year, with rail and road transport also hurt by the flooding.

Worst-case scenario: The logjam stretches into the fall, delaying shipments of new grain and forcing transporters to work through a backlog of old orders.

Small Business

While Wall Street frets over signs that the U.S. economy may be slowing…

On Main Street, hiring remains robust. Some 25% of small-business owners say a scarcity of skilled workers is the greatest problem they face…a record high. Contrast that with major firms like Ford, which plans to slash 7,000 jobs this year.

More smalls will increase pay and compensation to attract needed workers, which should help bolster consumer spending and support wider economic growth. More than half of small business owners report a dearth of qualified applicants.

Finance

Banks are still closing branches faster than they are opening new ones, as changing technology and consumer preferences shake up the industry. U.S. bank branch closings reached an all-time annual high of 3,023 in 2018.

Expect the trend to persist. U.S. Bancorp will shutter 10%-15% of branches by 2021. Wells Fargo wants to reduce its number of branches to below 5,000 by 2020.

But banks will continue to open more branches in key locations…areas where they can get more bang for their buck. Cities will likely be the main targets.

Article from The Kiplinger Letter June 14, 2019